Transcript

Scott Snyder: Hello, I’m Scott Snyder, and I am very pleased to be joined today by Guy Stanzione from Toppan Merrill’s SEC Compliance Services Team. Guy, thank you for joining me.

Guy Stanzione: Scott, thanks for having me.

Scott: Guy, there’s a lot of interest in anticipation for existing RILA issuers, as well as interest for issuers looking to enter into the RILA space. You recently served as a panelist on the Toppan Merrill hosted webinar, RILA Rulemaking: The Highs, The Lows, and The Unknowns, as well as publishing a recent blog. Can you give us some insight into the things that you learned from that webinar and maybe the reaction of the participants?

Guy: Scott, thanks for asking. When we sent out the registration email, we included three questions. The first of which was, how familiar are you with the new rule? And we were pleased to see that 60% were somewhat familiar with the rule, so we were able to tailor our discussion to the audience. Second question, do you currently have a registered RILA and/or are planning to launch a new issue? Here we found 59% of the respondents either have a RILA or planning to launch within the next year. Lastly, what challenges do you foresee to be compliant with the new rule? Interestingly enough, 52% of the respondents said transitioning to the amended N-4 was their biggest challenge.

Scott: Lots of awareness, certainly perhaps a little bit of nervousness about how do I get from here to there to be in compliance with the SEC’s new requirements.

Guy: Correct.

Scott: Guy, before we drive into more about the rule itself, let’s talk about RILA’s in general. They have a long history. Can you talk about that history and maybe exactly what a RILA is?

Guy: They’re a lesser known product. A RILA is a Registered Index Linked Annuity, hence the acronym, RILA. It’s one of several types of annuity contracts offered by insurance companies. The investors’ gains or losses are based on the performance of a benchmark, typically an index over a set period of time. The annuities feature a bounded return structure, which means they usually limit the losses, but also potentially limit the gains. So when the index goes up or down, the gains and the losses are in abounded return structure. Unlike variable products which utilize mutual funds as part of investment options, the RILA uses the index as part of the investment as opposed to a fund that could have high or low performance. While the market for RILAs has grown in recent years, it’s still a relatively small offering. There’s currently only about 22 companies that issue RILAs and about 80 RILAs in the market. But we anticipate that to grow because of this new rule.

Scott: So, let’s talk about that rule itself. The RILA rule has actually been in existence for a couple of decades, but the SEC made some changes here in July to update that rule. They proposed and have now passed some amendments. Can you talk about what happened here this summer, what the changes are, maybe what issuers should be looking out for?

Guy: One of the main features of the new RILA rule, issuers who have previously filed on either Form S-1 or S-3, Corporate S type registrations will now be required to file under form type N-4. The reason the SEC is doing that is they’re trying to standardize the disclosure in the annuity space. With the transition to N-4, there’s also a transition to the way the structure and the configuration of the documents will need to be presented.

Scott: So, Guy, let’s pause real quickly here because this is a change for issuers, they’re moving from an S-1 form to an N-4. Challenges related to that for the issuer would be, what?

Guy: One of the most significant challenges is the disclosure and how it’s configured. There’s not a lot of standardization between issuer one and issuer two and the way their perspectives are constructed. Transitioning under the new rule means everybody will have everything configured the same way.

Scott: Additional benefits perhaps for the issuer, you wanted to mention?

Guy: One of the key benefits is although the actual compliance date isn’t until May 1st of 2026, issuers will be able to create and file and go effective with a RILA, as early as September 23rd of this year, as long as certain conditions are met. A couple other benefits are RILA issuers for the
most part, have gotten universal exemptions to use Statutory Accounting Principles financials, rather than US GAAP financials, which we’ll go into in a little bit more detail. The main benefit in cost savings is the ability to use a summary prospectus, satisfied prospectus delivery requirements. Issuers will be paying the registration fees in arrears on Form 24-F2. There’s much more parity, which is a huge benefit in how the filings and the rules apply both variable and non-variable annuities. The use of form N-VPFS, the financial statements that have been in place under Rule 498A for several years, which will allow issuers to use financials across multiple registrations. There will also be a web hosting requirement, which is not a negative. It’s similar to what variable products are doing today under Form 498A. So, there’s also a knowledge and an understanding of how that works today.

Scott: Guy, we’ve talked about the of history of RILAs and the benefits of RILAs, but we’d be remiss if we didn’t talk about XBRL at this point. Talk about the intersection of the XBL taxonomy, maybe what issuers need to be aware of with these new amendments that have been passed.

Guy: Although XBRL will not be required until May 1st, 2026, issuers should be aware of the XBRL requirements, which are fairly consistent with how variable products tag today. The variable insurance product, the VIP taxonomy, is the taxonomy that’s used for variables. The benefit of using the VIP, as well as the benefit of RILA issuers being able to take advantage of the Statutory Accounting Principles financial use rather than US GAAP, is that US GAAP XBRL
tagging is not required.

Scott: The consistency is great, but will there be differences between XBRL tagging for variable products versus non-variable products?

Guy: Actually, there is. Although there is much of the same content that is required to be tagged, there’s two key elements that are consistent. Risk disclosures that are specific to RILAs will need to be tagged using the VIP taxonomy, as well as, disclosure that’s related to those relying
on rule 12-H7, that content will need to be tagged as well, which is different from what variables do today.

Scott: Guy, we’ve talked history, we’ve talked benefits, we’ve talked to XBRL. Are there any elements of the rule that perhaps are a little less favorable?

Guy: One of the elements where this rule making is less favorable is RILA sales materials are subject to Rule 156 disclosure and prospectus delivery requirements. So RILAs cannot take advantage of broad-based marketing. So, we’ve all seen with variable products, we’ve seen the commercials on TV, insurance companies that advertise their products. RILAs are not able to do that because they can’t communicate to the end-user without a prospectus in hand. The other
element that I think is a little bit of a downside is that closed books or products that are no longer sold must still convert to N-4. They can’t take advantage of a grandfathering methodology. One other one, which is not a strong negative but still a negative, the CIK that RILAs use for their products cannot be used for any other product types. So, you would need a new CIK for every product other than the RILAs that you’re bringing to market.

Scott: Guy, with any SEC rule, there’s always some items that they’re working on, things that they still need to finalize. Can you touch on a couple of those that maybe you’re aware of that our issuers should know of as well?

Guy: There’s still some uncertainty about fixed index annuities and how they’re going to work. There’s also still some uncertainty of what the potential maximum amount of loss could be. There’s some uncertainty of what the changes to the XBRL taxonomy will be.

Scott: Thanks for the terrific information on RILAs and for joining me on this episode of On The Dot.

Guy: Scott, thanks for having me.